Next on IRS to-do list: Benefits for same-sex couples

The IRS — already stretched thin managing scandals, a complicated tax code and the implementation of the health care law — has a new task: providing federal tax benefits to gay couples.

At its heart, the case to overturn the Defense of Marriage Act centered on tax policy. Edith Windsor, the plaintiff in the case, was slapped with a $363,000 tax bill after the death of her wife. She wouldn’t have faced the tax if the federal government had recognized her marriage, which took place in Canada. The couple lived in New York, a state that recognized Windsor’s union when her wife died in 2009.

“It is almost worse, administratively, in some ways,” said Anthony Infanti, a professor of law at the University of Pittsburgh School of Law. “You still have a whole class of people who are unmarried who have the same uncertainty as they did before the court ruled.”

For starters, the agency will essentially have to create two tax regimes.

One system, for couples in states where same-sex marriage is recognized, will allow gays and lesbians to file their tax returns jointly, exclude them from paying taxes on their spouse’s estate and clear them to contribute together to health savings and flexible spending accounts. The other system, for couples in states that don’t recognize same-sex marriage, wouldn’t allow such benefits.

The tax situation is especially tricky for same-sex couples who move around.

A couple who marries in a state or country where same-sex unions are legal but lives in a state where such marriages aren’t recognized wouldn’t receive federal tax benefits.

And a couple who moved from a state like Maryland, where same-sex marriage is legal, to a state such as Virginia, where the constitution bans recognition of such unions, would see their tax benefits curbed or eliminated entirely.

By sidestepping the issue of whether same-sex marriage should be recognized nationally in its Proposition 8 decision, the Supreme Court is creating an even murkier tax system than the one in place today, Infanti said.

“These two decisions together will now open up a Pandora’s box about who will be considered married for federal purposes and how the disconnect between federal recognition of same-sex marriage and state-level non-recognition of same-sex marriage will play out,” Infanti said.

The rulings also create a logistical nightmare for the seven states that recognize civil unions or other legal partnerships that are not already defined as marriage. Couples in states like Illinois will still have access to the state benefits of their legal partnership, but the court has not made clear if their partnerships are legal in the eyes of the federal government.

“The issue of tax treatment for folks in civil unions, it is not addressed or resolved by this decision at all,” said John Mahoney, an attorney at the law firm Tully Rinckey. “The IRS usually makes decisions on the tax treatment at the federal level, but it isn’t clear if a civil union is the same thing as a marriage.”